UK DB pension deficit increases by £64bn in November

The combined deficit of UK defined benefit (DB) pension schemes against long-term funding targets increased by around £64bn over November to £392bn, according to XPS’s DB:UK Funding Tracker.

Based on combined assets of £1,959bn and liabilities of £2,351bn, the tracker showed that the average funding level of UK pension schemes on a long-term target basis had fallen to 83 per cent as of 30 November 2021, down from 86 per cent in October.

XPS suggested that rising inflation expectations and a significant fall in gilt yields had prompted the increase in the deficit, whilst equity markets and oil prices were also continuing to recover following the emergence of the new Omicron Covid-19 variant.

Indeed, according to the tracker, the markets’ reaction to Omicron alone added around £30bn to UK DB deficits "overnight", while XPS consultant, Tom Birkin, estimated that rising inflation expectations and falling gilt yields added another £136bn to UK DB liabilities this month.

Birkin also warned that the period of "significant market volatility" looks set to continue amid investor uncertainty over the new Omicron Covid-19 variant.

“If inflation expectations continue to rise, then liabilities can be expected to increase further, however most schemes do have significant protection in place in the form of capped inflationary increases on benefits and inflation hedging investments," he said.

The tracker also suggested that schemes will take an average of 19 years to reach their long-term targets, which XPS warned was is slightly longer than the timeframe by which cashflows peak and schemes are estimated to be ‘significantly mature’.

However, the provider suggested that member options, on typical terms and take-up rates, could reduce liabilities on long-term funding targets by around £54bn, potentially reducing the time to full funding by as much as four years.

In particular, it estimated that around £10bn of savings could be gained from pension increase exchange (PIE) exercises, as well as £24bn from transfer values over-55s, £11bn from transfer values for under-55s, and a further £9bn in potential savings from trivial commutations.

XPS clarified, however that the potential for savings will vary from scheme to scheme depending on a scheme’s membership and structure, suggesting that schemes with higher pension increases and younger memberships will have the most to gain from a funding perspective.

XPS consultant, Paul Hamilton, added: “The provision of member options has benefits for all stakeholders. Members have choice over how they access their benefits to suit their own personal circumstances whilst trustees and employers can benefit from funding gains and risk reduction.

“Helping members understand their choices is key to unlocking the potential of member options, as informed members are more likely to make use of member options and, importantly, are less susceptible to pension scams.”

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